EVENTS

Corporate tax dodgers

For a long time, Apple successfully built up an image as the good guys, cool and hip compared to the stodgy and evil Microsoft IBM, beginning with its classic ‘1984’ ad that aired during the Super Bowl of that year

I like Apple products. Users of any product, especially if it is pricey, tend to want to think they are supporting a good company. But Apple is being increasingly revealed as being as greedy and unscrupulous as any other big corporation, even worse perhaps, and practices the same kinds of despicable tax avoidance schemes as they do. How do these companies it?

There are many ways but one of the main strategies is to is create off-shore subsidiary shell companies in countries like Ireland. Why Ireland? Felix Salmon explains how by doing so companies like Apple end up paying taxes at a much lower rate than one would expect.

This is particularly shocking to the US public, which has to pay taxes on its global income. Every other country’s billionaires are extremely good at escaping into a state of tax-free statelessness; America’s aren’t, and we expect that if you’re rich American, you’re going to pay a substantial amount of US taxes.

American multinational corporations, in this sense, lie somewhere in the middle: they don’t need to pay income tax on their global income, and so they can avoid billions of dollars in taxes by moving income to tax-friendly jurisdictions like Ireland, or to subsidiaries such as Apple Operations International and Apple Sales International, which pay taxes in no jurisdiction at all. (Their headquarters are in Ireland, so they are sheltered from US taxes, but since their operations are mostly in the US, they don’t pay Irish taxes, either.)

The only real punishment for avoiding taxes, if you’re a US corporation, is that your offshore profits are stuck offshore, where it can be hard to invest them or return them to shareholders. So when Apple claims in its testimony that it “supports comprehensive reform of the US corporate tax system”, note its two key provisos: that such reform be “revenue neutral”, and that it allow “free movement of capital back to the US”. The first would mean that US corporations wouldn’t actually pay the taxes they’re avoiding right now: total corporate taxes would remain at an all-time low. And the second would mean that the biggest corporate tax loophole of all — the ability to pay no taxes on foreign earnings — would be made substantially bigger.

So these corporations make profits globally without paying US taxes and then pressure US lawmakers for a ‘one-time’ amnesty (also called a ‘repatriation holiday’) so that they can bring their profits back to the US without paying the taxes they avoided by being off-shore, thus getting the best of both worlds. But the ‘one-time’ merely means a short time until their overseas cash holdings get so large that they want to bring them back again. They achieved this trick back in 2004 and now they are trying to do it again. And then they will go back to avoiding taxes off-shore until it is time for another ‘one-time’ amnesty.

And rich people and corporations have never influenced that process in any way have they?

You can’t blame the companies who take advantage of them.

You can blame anybody who seeks to gain an unfair advantage by twisting the letter of the law so it perverts the spirit and underlying intent.

And you can very easily prevent much of this abuse of the tax code – it’s called a GAAR (General Anti-Avoidance Rule), under which any arrangement which you can’t prove is primarily intended to achieve some specific business goal (e.g. increase sales, attract most qualified employees, access to markets, etc) rather than to reduce taxes is deemed illegal.

Those are not loop holes because they were enacted with specific goals in mind.

Some “loopholes” are introduced because of lobbying by wealthy business interests. Other times accountants find creative ways to exploit exceptions and credits introduced with specific goals in mind. Both types of activity are immoral for 3 reasons:

1. The democratic will of the people, in pursuit of a legitimate and constitutional governmental goal, is subverted.

2. It distorts competition in the marketplace. The most advantageous tax avoidance schemes are not available to most businesses, only large corporations (and extremely wealthy individuals, but let’s stick to the corporate world for a moment) can make use of them. So the corporate equivalent of social mobility is frustrated – it’s easier for existing large players in any particular market to stay on top and it’s harder for new businesses with new ideas or innovative products to break into a market.

3. THIS IS NOT A FREAKING GAME! This is what really riles me when I hear people like the Apple CEO saying how they pay all the taxes they’re legally obliged to. They’re saying “Hey, we played the game according to the rules. It’s not our fault some of the other players didn’t know about rule 7b.” But we’re not playing Mornington Crescent here.

When governments can’t raise the money to pay for important things like education and health care and police and courts and roads and rubbish disposal and other important things, not only is the whole economy (including those companies which have so cleverly avoided paying their taxes) harmed, real people are harmed in real ways. AND PEOPLE DIE!

I do have to correct a little technicality. The 1984 Superbowl ad was not a slight against Microsoft (which itself was at the time a comparatively small company, at least not nearly as huge as it became in the 90’s), but against the giant IT company of that time, IBM.